While it hasn’t been a bright year for Cathie Wood’s Ark Invest, she sees strength ahead for the company’s investment strategy should the US slip into a recession. The company’s flagship ARK Innovation ETF is down more than 60% for the year, underperforming the broader market. The fund, which includes mostly tech names, tends to underperform in a rising interest rate environment as investors are seeing the Federal Reserve raise interest rates to tame high inflation. However, as aggressive central bank rate hikes begin to slow the economy and potentially push America into recession, Wood expects his fund to change. “Interest rates will follow inflation,” she said during a CNBC professional talk on Monday. “It looks like inflation has peaked and if this is the main reason strategy and strategies like ours have been pummeled over the past 18 months to two years, then one would surmise that we will benefit from the opposite scenario.” There have been some signals on this lately – the ETF had its best day ever, up 14%, after weaker-than-expected inflation. When sentiment gets very bleak, or it’s clear that the economy is deteriorating, that’s usually when the Fed will pause to raise interest rates or even start cutting them. That often benefits growth strategies like hers, she says. She added that another reason her strategies tend to work better in a pre-recession environment is that they are looking to new leadership and the companies she invests in are establishing themselves. set up to benefit from what Ark sees as one of the greatest exponential growth opportunities in history. “The other reason is because our fundamentals are far superior to the fundamentals of more cyclical companies,” she said. “And so we’ll have outstanding revenue growth and our cash flow will continue to grow in a proportionate way over such a period.” The biggest recession factor now In terms of the possibility of a recession in 2023, the biggest factor Wood sees right now is the pace of strong interest rate hikes to cool down hot inflation. She sees Federal Reserve Chairman Jerome Powell absorbing a page from previous Federal Reserve Chairman Paul Volcker, who handled high inflation in the 1970s and 1980s by pushing interest rates up fast. fast. Powell is now doing the same thing – in the last four central bank meetings, they raised the benchmark interest rate by 0.75 percentage points each. These increases, combined with previous ones this year, mean that the federal funds rate has risen from near zero to about 3.75% to 4.00%. “We think a 16-fold increase in rates is a mistake,” Wood said. She added that she sees an inventory downturn coming due to the way companies over-order as demand spikes during the Covid period, spurred by pandemic stimulus measures. “We have a huge inventory problem,” Wood said, adding that she expects most of the stock to be cleared by Christmas. However, the ramifications for retail profits are likely to be severe, she said. She disagrees that 2023 will be the year the downward spiral begins. Instead, she expects a global recession in sync with economic problems in China due to Covid-free policies and assets and the energy crisis in Europe. “I think the rest of the world is going to drag us down because they’re in a recession and the recession is worse than I think the US is,” Wood said.